SB    EflO 


O 
CO 

ct^ 

CO 

en 


GIFT  OF 


NOV   i,c>   1918 


Government  Ownership 
of  Railroads, 

and 

War  Taxation 


OTTO  H.  KAHN 


1918 


Government  Ownership 
of  Railroads, 

and 

War  Taxation 


OTTO  H.  KAHN 


AN  ADDRESS  BEFORE  THE 

NATIONAL  INDUSTRIAL  CONFERENCE  BOARD 

NEW  YORK,  OCTOBER  10,  1918 


- 


I 


GOVERNMENT  OWNERSHIP 
OF  RAILROADS 

PATERNALISTIC  control,  even 
when  entirely  benevolent  in  intent, 
is  generally  harmful  in  effect.    It  is 
apt  to  be  doubly  so  when,  as  sometimes 
occurs,  it  is  punitive  in  intent. 

The  history  of  our  railroads  in  the  last 
ten  years  is  a  case  in  point. 

In  their  early  youth  our  railroads  were 
allowed  to  grow  up  like  spoiled,  wilful, 
untamed  children.  They  were  given 
pretty  nearly  everything  they  asked  for, 
and  what  they  were  not  given  freely  they 
were  apt  to  get  somehow,  anyhow.  They 
fought  amongst  themselves  and  in  doing 
so  were  liable  to  do  harm  to  persons  and 
objects  in  the  neighborhood.  They  were 
overbearing' and  inconsiderate  and  did 
not  show  proper  respect  to  their  parent, 
i.  e.,  the  people. 

3 

383550 


OWNERSHIP 

But  the  fond  parent,  seeing  how  strong 
and  sturdy  they  were  and  on  the  whole, 
how  hustling  and  effective  in  their  work, 
and  how,  with  all  their  faults  of  temper 
and  demeanor,  they  made  themselves  so 
useful  around  the  house  that  he  could  not 
really  get  along  without  them,  only 
smiled  complacently  at  their  occasional 
mischief  or  looked  the  other  way.  More- 
over, he  was  really  too  busy  with  other 
matters  to  give  proper  attention  to  their 
education  and  upbringing. 

As  the  railroads  grew  towards  man's 
estate  and  married  and  begot  other 
railroads,  they  gradually  sloughed  off  the 
roughness  and  objectionable  ways  of 
their  early  youth,  and  though  they  did 
not  sprout  wings,  and  though  once  in  a 
while  they  still  did  shock  the  community, 
they  were  amazingly  capable  at  their 
work  and  really  rendered  service  of 
inestimable  value. 


OF  RAILROADS 

But  meanwhile,  for  various  reasons  and 
owing  to  sundry  influences,  the  father  had 
grown  testy  and  rather  sour  on  them. 
He  cut  their  allowance,  he  restrained 
them  in  various  ways,  some  wise,  some 
less  so,  he  changed  his  will  in  their  dis- 
favor, he  showed  marked  preference  to 
other  children  of  his.  And  one  fine  day, 
partly  because  he  was  annoyed  at  the 
discovery  of  some  wrongdoing  in  which, 
despite  his  repeated  warnings,  a  few  of 
the  railroads  had  indulged  (though  the 
overwhelming  majority  were  blameless) 
and  partly  at  the  prompting  of  plausible 
self-seekers  or  well-meaning  specialists  in 
the  improvement  of  everybody  and  every- 
thing— one  fine  day  he  lost  his  temper 
and  with  it  his  sense  of  proportion.  He 
struck  blindly  at  the  railroads,  he  ap- 
pointed guardians  (called  commissions) 
to  whom  they  would  have  to  report 
daily,  who  would  prescribe  certain  rigid 
rules  of  conduct  for  them,  who  would 


GOVERNMENT  OWNERSHIP 

henceforth  determine  their  allowance  and 
supervise  their  method  of  spending  it,  etc. 
And  these  commissions,  naturally  wish- 
ing to  act  in  the  spirit  of  the  parent  who 
had  designated  them,  but  actually  being, 
as  guardians  are  liable  to  be,  more  harsh 
and  severe  and  unrelenting  than  he  would 
have  been  or  really  meant  to  be,  put  the 
railroads  on  a  starvation  diet  and  other- 
wise so  exercised  their  functions,  with 
good  intent,  doubtless,  in  most  cases,  that 
after  a  while  those  railroads,  formerly  so 
vigorous  and  capable,  became  quite 
emaciated  and  several  of  them  suc- 
cumbed under  the  strain  of  the  regime 
imposed  upon  them.  And  then,  seeing 
their  condition  and  having  need,  owing 
to  special  emergencies,  of  railroad  services 
which  required  great  physical  strength 
and  endurance,  one  fine  morning  the 
parent  determined  upon  the  drastic  step 
of  taking  things  into  his  own  hands. 
And  so  forth  . 


OF  RAILROADS 


ii 


To  drop  the  style  of  story-telling:  In- 
dividual enterprise  has  given  us  what  is 
admittedly  the  most  efficient  railroad 
system  in  the  world.  It  has  done  so  whilst 
making  our  average  capitalization  per 
mile  of  road  less,  the  scale  of  wages 
higher,  the  average  rates  lower,  the 
service  and  conveniences  offered  to  the 
shipper  and  the  traveler  greater  than  in 
any  other  of  the  principal  countries. 

It  must  be  admitted  that  in  the  pioneer 
period  of  railroad  development,  and  for 
some  years  thereafter,  numerous  things 
were  done,  and  although  generally  known 
to  be  done,  were  tolerated  by  the  Govern- 
ment and  the  public,  which  should  never 
have  been  permitted.  But  during  the 
second  administration  and  upon  the 

7 


GOVERNMENT  OWNERSHIP 

courageous  initiative  of  President  Roose- 
velt these  evils  and  abuses  were  reso- 
lutely tackled  and  a  definite  and  effective 
stop  put  to  most  of  them.  Means  were 
provided  by  salutary  legislation,  fortified 
by  decisions  of  the  Supreme  Court,  for 
adequate  supervision  and  regulation  of 
railroads. 

The  railroads  promptly  fell  in  line  with 
the  countrywide  summons  for  a  more 
exacting  standard  of  business  ethics. 
The  spirit  and  practices  of  railroad 
administration  became  standardized,  so 
to  speak,  at  a  moral  level  certainly  not 
inferior  to  that  of  any  other  calling.  It 
is  true,  certain  regrettable  abuses  and 
incidents  of  misconduct  still  came  to 
light  in  subsequent  years,  but  these  were 
sporadic  instances,  by  no  means  char- 
acteristic of  railroading  methods  and 
practices  in  general,  condemned  by  the 
great  body  of  those  responsible  for  the 


OF  RAILROADS 

conduct  of  our  railroads,  no  less  than  by 
the  public  at  large,  and  entirely  capable  of 
being  dealt  with  by  the  existing  law, 
possibly  amended  in  nonessential  fea- 
tures, and  by  the  force  of  public  opinion. 
Unfortunately,  the  law  enacted  under 
President  Roosevelt's  administration  was 
not  allowed  to  stand  for  a  sufficient  length 
of  time  to  test  its  effects.  The  enactment 
of  new  railroad  legislation  in  1909,  largely 
shaped  by  Congressmen  and  Senators  of 
very  radical  tendencies  and  hostile  to  the 
railroads,  and  acquiesced  in  by  President 
Taft  with  ill-advised  and  opportunist 
complacency,  established,  for  the  first 
time  in  America,  paternalistic  control 
over  the  railroads.  It  was  an  unscien- 
tific and  ill-devised  statute,  gravely  de- 
fective in  important  respects  and  bearing 
evidence  of  having  been  shaped  in  heat, 
hurry  and  anger.  Mr.  Taft  himself,  it 
seems,  has  since  recognized  its  faultiness, 

9 


GOVERNMENT  OWNERSHIP 

for  he  has  repeatedly  and  publicly  pro- 
tested against  the  over-regulation,  the 
starvation  and  the  oppression  of  the 
railroad  which  were  the  inevitable  and 
easy-to-be-foreseen  consequences  of  its 
enactment. 

The  States,  to  extent  that  they  had 
not  already  anticipated  it,  were  not  slow 
to  follow  the  precedent  set  by  the  Federal 
Government.  The  resulting  structure  of 
Federal  and  State  laws  under  which  the 
railroads  were  compelled  to  carry  on 
their  business,  was  little  short  of  a  legis- 
lative monstrosity. 


10 


OF  RAILROADS 


in 

You  all  know  the  result.  The  spirit  of 
enterprise  in  railroading  was  killed.  Sub- 
jected to  an  obsolete  and  incongruous 
national  policy,  hampered,  confined, 
harassed  by  multifarious,  minute,  nar- 
row, and  sometimes  flatly  contradictory 
regulations  and  restrictions,  State  and 
Federal,  starved  as  to  rates  in  the  face  of 
steadily  mounting  costs  of  labor  and 
materials— that  great  industry  began  to 
fall  away.  Initiative  on  the  part  of  those 
in  charge  became  chilled,  the  free  flow  of 
investment  capital  was  halted,  creative 
ability  was  stopped,  growth  was  stifled, 
credit  was  crippled. 

The  theory  of  governmental  regulation 
and  supervision  was  entirely  right.  No 
fair-minded  man  would  quarrel  with  that. 

11 


GOVERNMENT  OWNERSHIP 

The  railroads  had  exercised  great,  and  in 
certain  respects  undoubtedly  excessive 
power  for  a  long  time,  and  all  power 
tends  to  breed  abuses  and  requires  limi- 
tations and  restraints.  But  the  practical 
application  of  that  theory  was  wholly  at 
fault  and  in  defiance  of  both  economic 
law  and  common  sense.  It  was  bound  to 
lead  to  a  crisis. 

It  is  not  the  railroads  that  have  broken 
down,  it  is  our  railroad  legislation  and 
commissions  which  have  broken  down. 

And  now  the  Government,  in  the  emer- 
gency of  war,  probably  wisely  and,  in 
view  of  the  prevailing  circumstances, 
necessarily,  has  assumed  the  operation  of 
the  railroads. 

The  Director  General  of  Railroads, 
rightly  and  courageously,  proceeded  to  do 
immediately  that  which  the  railroads  for 
years  had  again  and  again  asked  in  vain 
to  be  permitted  to  do — only  more  so. 

12 


OF  RAILROADS 

Freight  rates  were  raised  twenty-five 
per  cent.,  passenger  rates  in  varying 
degrees  up  to  fifty  per  cent.  Many 
wasteful  and  needless  practices  heretofore 
compulsorily  imposed  were  done  away 
with. 

Passenger  train  service,  for  the  aboli- 
tion of  some  of  which  the  railroads  had 
petitioned  unsuccessfully  for  years,  was 
cut  to  the  extent  of  an  aggregate  train 
mileage  of  over  47,000,000. 

The  system  of  pooling  for  which  since 
years  many  of  the  railroads  had  in  vain 
endeavored  to  obtain  legal  sanction  was 
promptly  adopted  with  the  natural  result 
of  greater  simplicity  and  directness  of 
service  and  of  considerable  savings. 

The  whole  theory  under  which  intelli- 
gent, effective  and  systematic  co-opera- 
tion between  the  different  railways  had 
been  made  impossible  formerly,  was 
thrown  into  the  scrap  heap. 

13 


GOVERNMENT  OWNERSHIP 

Incidentally,  certain  services  and  con- 
veniences were  abolished,  of  which  the 
railroad  managements  would  never  have 
sought  to  deprive  the  public,  and  the  very 
suggestion  of  the  abrogation  of  which 
would  have  led  to  indignant  and  quickly 
effective  protest  had  it  been  attempted  in 
the  days  of  private  control. 

Lest  this  remark  might  be  misunder- 
stood, let  me  say  that  I  have  no  word  of 
criticism  against  Mr.  McAdoo's  adminis- 
tration of  the  railroads,  as  far  as  I  have 
been  able  to  observe  it. 

I  think,  on  the  contrary,  that  he  is 
entitled  to  great  praise  and  that  he  has 
handled  the  formidable  and  complex  task 
confided  to  him  with  a  high  degree  of 
ability,  fine  courage,  indefatigable  energy, 
and  with  the  evident  determination  to 
keep  the  running  of  the  railroads  clear  of 
politics  and  to  make  them  above  all  things 
effective  instruments  in  our  war  effort. 

14 


OF  RAILROADS 


IV 

For  a  concise  statement  of  the  results 
accomplished  elsewhere  under  govern- 
ment ownership  I  would  recommend  you 
to  obtain  from  the  Public  Printer,  and  to 
read,  a  short  pamphlet  entitled  "Histori- 
cal Sketch  of  Government  Ownership  of 
Railroads  in  Foreign  Countries,"  pre- 
sented to  the  Joint  Committee  of  Congress 
on  Interstate  Commerce  by  the  great 
English  authority,  Mr.  W.  M.  Acworth.  It 
will  well  repay  you  the  half  hour  spent  in 
its  perusal.  You  will  learn  from  it  that, 
prior  to  the  war,  about  fifty  per  cent,  of 
the  railways  in  Europe  were  state  rail- 
ways; that  in  practically  every  case  of  the 
substitution  of  government  for  private 
operation  (with  the  exception,  subject  to 
certain  reservations,  of  Germany)  the 

15 


GOVERNMENT  OWNERSHIP 

service  deteriorated,  the  discipline  and 
consequently  the  punctuality  and  safety 
of  train  service  diminished,  politics  came 
to  be  a  factor  in  the  administration  and 
the  cost  of  operations  increased  vastly. 
(The  net  revenue,  for  example,  of  The 
Western  Railway  of  France  in  the  worst 
year  of  private  ownership  was  $13,750,000, 
in  the  fourth  year  of  government  opera- 
tion it  fell  to  $5,350,000.)  He  quotes  the 
eminent  French  economist,  Leroy-Beau- 
lieu,  as  follows: 

"One  may  readily  see  how  dangerous  to 
the  liberty  of  citizens  the  extension  of  the 
industrial  regime  of  the  State  would  be, 
where  the  number  of  functionaries  would 
be  indefinitely  multiplied.  .  .  .  From  all 
points  of  view  the  experience  of  State  rail- 
ways in  France  is  unfavorable  as  was  fore- 
seen by  all  those  who  had  reflected  upon  the 
bad  results  given  by  the  other  industrial 
undertakings  of  the  State.  .  .  .  The 
State,  above  all,  under  an  elective  govern- 
ment, cannot  be  a  good  commercial  mana- 
16 


OF  RAILROADS 

ger  .  .  .  The  experience  which  we  have 
recently  gained  has  provoked  a  very  lively 
movement,  not  only  against  acquisition 
of  the  railways  by  the  State,  but  against 
all  extension  of  State  industry.  I  hope 
.  .  .  that  not  only  we,  but  our  neighbors 
also  may  profit  by  the  lesson  of  these  facts." 

Mr.  Acworth  mentions  as  a  character- 
istic indication  that  after  years  of  sad 
experience  with  governmentally  owned 
and  operated  railways,  the  Italian'  Gov- 
ernment, just  before  the  war,  started  on 
the  new  departure  (or  rather  returned  to 
the  old  system)  of  granting  a  concession 
to  a  private  enterprise  which  was  to  take 
over  a  portion  of  the  existing  state  rail- 
way, build  an  extension  with  the  aid  of 
state  subsidies,  and  then  work  on  its  own 
account  both  sections  as  one  undertaking 
under  private  management. 

I  may  add,  as  a  fact  within  my  own 
knowledge,  that  shortly  before  the  out- 
break of  the  war  the  Belgian  Government 
was  studying  the  question  of  returning 

17 


GOVERNMENT  OWNERSHIP 

its  state  railways  to  private  enterprise 
and  management. 

Mr.  Acworth  relates  a  resolution 
unanimously  passed  by  the  French  Senate 
a  few  years  after  the  State  had  taken 
over  certain  lines,  beginning:  "The  de- 
plorable situation  of  the  State  system, 
the  insecurity  and  irregularity  of  its 
workings."  He  gives  figures  demon- 
strating the  invariably  greater  efficiency, 
economy  and  superiority  of  service  of 
private  management  as  compared  to 
State  management  in  countries  where 
these  two  systems  are  in  operation  side  by 
side.  He  treats  of  the  effect  of  the 
conflicting  interests,  sectional  and  other- 
wise, which  necessarily  come  into  play 
under  government  control  when  the 
question  arises  where  new  lines  are  to  be 
built  and  what  extensions  to  be  made  of 
existing  lines. 

He  asks:    "Can  it  be  expected  that 

18 


OF  RAILROADS 

they  (these  questions)  will  be  decided 
rightly  by  a  minister  responsible  to  a 
democratic  legislature,  each  member  of 
which,  naturally  and  rightly,  makes  the 
best  case  he  can  for  his  own  constituents, 
while  he  is  quite  ignorant,  even  if  not 
careless,  of  the  interests,  not  only  of  his 
neighbor's  constituency,  but  of  the  public 
at  large?"  And  he  replied:  "The  answer 

is  written  large  in  railway  history 

The  facts  show  that  Parliamentary  inter- 
ference has  meant  running  the  railways, 
not  for  the  benefit  of  the  people  at  large, 
but  to  satisfy  local  and  sectional  or  even 
personal  interests."  He  maintains  that 
in  a  country  governed  on  the  Prussian 
principles  railroad  operation  and  plan- 
ning may  be  conducted  by  the  Govern- 
ment with  a  fair  degree  of  success,  as  an 
executive  function,  but  in  democratic 
countries,  he  points  out  that  in  normal 
times  "it  is  the  legislative  branch  of  the 

19 


GOVERNMENT  OWNERSHIP 

government  which  not  only  decides  policy 
but  dictates  always  in  main  outline,  often 
down  to  the  detail  of  a  particular  appoint- 
ment or  a  special  rate,  how  the  policy 
shall  be  carried  out." 

For  corroboration  of  this  latter  state- 
ment we  need  only  turn  to  the  array  of 
statutes  in  our  own  States,  which  not 
only  fix  certain  railroad  rates  by  legisla- 
tive enactment,  but  deal  with  such  details 
as  the  repair  of  equipment,  the  minimum 
movement  of  freight  cars,  the  kind  of 
headlights  to  be  used  on  locomotives,  the 
safety  appliances  to  be  installed,  etc.— 
and  all  this  in  the  face  of  the  fact  that 
these  States  have  Public  Service  Com- 
missions whose  function  it  is  to  supervise 
and  regulate  the  railroads. 

The  reason  why  the  system  of  state 
railways  in  Germany  was  largely  free 
from  most,  though  by  no  means  all,  of 
the  unfavorable  features  and  results 

20 


OF  RAILROADS 

produced  by  government  ownership  and 
operation  elsewhere,  is  inherent  in  the 
habits  and  conditions  created  in  that 
country  by  generations  of  autocratic  and 
bureaucratic  government.  But  Mr.  Ac- 
worth  points  out  very  acutely  that  while 
German  manufacturers,  merchants,  finan- 
ciers, physicians,  scientists,  etc.,  "have 
taught  the  world  a  good  deal  in  the 
twenty  years  preceding  the  war,  German 
railway  men  have  taught  the  world 
nothing."  And  he  asks:  "Why  is  this?" 
His  answer  is:  "Because  they  were  state 
officials,  and,  as  such,  bureaucrats  and 
routiniers,  and  without  incentive  to  in- 
vent and  progress  themselves  or  to 
encourage  or  welcome  or  even  accept 
inventions  and  progress. 

It  is  the  private  railways  of  England 
and  France,  and  particularly  of  America, 
which  have  led  the  world  in  improve- 
ments and  new  ideas,  whilst  it  would  be 

21 


GOVERNMENT  OWNERSHIP 

difficult  to  mention  a  single  reform  or 
invention  for  which  the  world  is  indebted 
to  the  state  railways  of  Germany." 

The  question  of  the  disposition  to  be 
made  of  the  railroads  after  the  war  is 
one  of  the  most  important  and  far- 
reaching  of  the  post-bellum  questions 
which  will  confront  us.  It  will  be  one  of 
the  great  test  questions,  the  answer  to 
which  will  determine  whither  we  are 
bound. 


22 


OF  RAILROADS 


v 

And,  it  seems  to  me,  one  of  the  duties 
of  business  men  is  to  inform  themselves 
accurately  and  carefully  on  this  subject, 
so  as  to  be  ready  to  take  their  due  and 
legitimate  part  in  shaping  public  opinion, 
and  indeed  to  start  on  that  task  now, 
before  public  opinion,  one-sidedly  in- 
formed and  fed  of  set  purpose  with 
adroitly  colored  statements  of  half  truths, 
crystallizes  into  definite  judgment. 

My  concern  is  not  for  the  stock  and 
bond  holders.  They  will,  I  have  no 
doubt,  be  properly  and  fairly  taken  care 
of  in  case  the  Government  were  definitely 
to  acquire  the  railroads.  Indeed,  it  may 
well  be,  that  from  the  standpoint  of  their 
selfish  interests,  a  reasonable  guarantee  or 
other  fixed  compensation  by  the  Govern- 

23 


GOVERNMENT  OWNERSHIP 

ment  would  be  preferable  to  the  financial 
risks  and  uncertainties  under  private  rail- 
road operation  in  the  new  and  untried  era 
which  we  shall  enter  after  the  war.  I 
know,  indeed,  that  not  a  few  large 
holders  of  railroad  securities  take  this 
view  and  therefore  have  this  preference. 
Nor  do  I  speak  as  one  who  believes 
that  the  railroad  situation  can  be  re- 
stored just  as  it  was  before  the  war. 
The  function,  responsibility  and  obliga- 
tion of  the  railroads  as  a  whole  are  pri- 

i 

marily  to  serve  the  interests  and  economic 
requirements  of  the  nation.  The  dis- 
jointed operation  of  the  railroads,  each 
one  considering  merely  its  own  system 
(and  being  under  the  law  practically 
prevented  from  doing  otherwise)  will,  I 
am  sure,  not  be  permitted  again. 

The  relinquishment  of  certain  features 
of  our  existing  legislation,  the  addition 
of  others,  a  more  clearly  defined  and  pur- 

24 


OF  RAILROADS 

poseful  relationship  of  the  nation  to  the 
railroads,  involving  amongst  other  things 
possibly  some  financial  interest  of  the 
Government  in  the  results  of  railroad 
operations,  are  certain  to  come  from  our 
experiences  under  Government  operation 
and  from  a  fresh  study  of  the  subject,  in 
case  the  railroads,  as  I  hope,  are  returned 
to  private  management. 

Personally  I  believe  that  in  its  under- 
lying principle,  the  system  gradually 
evolved  in  America  but  never  as  yet 
given  a  fair  chance  for  adequate  transla- 
tion into  practical  execution,  is  an  almost 
ideal  one.  If  preserves  for  the  country, 
in  the  conduct  of  its  railroads,  the  ines- 
timable advantage  of  private  initiative, 
efficiency,  resourcefulness  and  financial 
responsibility,  while  at  the  same  time 
through  governmental  regulation  and 
supervision  it  emphasizes  the  semi-public 
character  and  duties  of  railroads,  pro- 

25 


GOVERNMENT  OWNERSHIP 
OF  RAILROADS 

tects  the  community's  rights  and  just 
claims  and  guards  against  those  evils  and 
excesses  of  unrestrained  individualism 
which  experience  has  indicated. 

It  is,  I  am  profoundly  convinced,  a  far 
better  system  than  government  owner- 
ship of  railroads,  which,  wherever  tested, 
has  proved  its  inferiority  except,  to  an 
extent,  in  the  Germany  on  which  the 
Prussian  Junker  planted  his  heel  and  of 
which  he  made  a  scourge  and  a  horrible 
example  to  the  world;  and  the  very  rea- 
sons which  have  made  state  railways 
measurably  successful  in  that  Germany 
are  the  reasons  which  would  make  govern- 
ment ownership  and  operation  in  America 
a  menace  to  our  free  institutions,  a  detri- 
ment to  our  racial  characteristics  and  a 
grave  economic  disservice. ; 


26 


PUNITIVE  PATERNALISM 
IN  TAXATION 


i 


PUNITIVE  PATERNALISM 
IN  TAXATION 

I  have  spoken  of  the  treatment  of  our 
railroads  in  the  past  ten  years  as  "puni- 
tive paternalism."  In  some  respects  this 
same  term  may  be  applied  to  our  existing 
and  proposed  war  taxation. 

Of  course,  the  burden  of  meeting  the 
cost  of  the  war  must  be  laid  according  to 
capacity  to  bear  it.  It  would  be  crass 
selfishness  to  wish  it  laid  otherwise  and 
fatuous  folly  to  endeavor  to  have  it  laid 
otherwise. 

We  all  agree  that  the  principal  single 
sources  of  war  revenue  must  necessarily 
be  business  and  accumulated  capital,  but 
these  sources  should  not  be  used  exces- 
sively and  to  the  exclusion  of  others. 

27 


PUNITLVE  PATERNALISM 

The  structure  of  taxation  should  be 
harmonious  and  symmetrical.  No  part  of 
it  should  be  so  planned  as  to  produce  an 
unscientific  and  dangerous  strain. 

The  science  of  taxation  consists  in 
raising  the  largest  obtainable  amount  of 
needed  revenue  in  the  most  equitable 
manner,  with  the  least  economic  dis- 
turbance and,  as  far  as  possible,  with  the 
effect  of  promoting  thrift. 

The  House  Bill  proposes  to  raise  from 
income,  excess  or  war  profit  and  inheri- 
tance taxes  $5,686,000,000  out  of  an 
estimated  total  of  $8,182,000,000.  In 
other  words,  almost  seventy  per  cent,  of 
our  stupendous  total  taxation  is  to  come 
from  these  few  sources.  It  seems  to  me 
that  the  effect  and  meaning  of  this  is  to 
penalize  capital,  to  fine  business  success, 
as  well  as  thrift  and  self-denial  practised 
in  the  past,  thereby  tending  to  discourage 
saving. 

28 


IN  TAXATION 

The  House  Bill  fails,  on  the  other  hand, 
to  impose  certain  taxes  the  effect  of  which 
is  to  promote  saving.  Intentionally  or 
not,  yet  effectively,  it  penalizes  certain 
callings  and  sections  of  the  country  and 
favors  others. 

Let  me  say  at  the  outset  that  my  criti- 
cism does  not  refer  to  the  principle  of  an 
eighty  per  cent,  war  profits  tax.  Indeed, 
I  have  from  the  very  beginning  advocated 
a  high  tax  on  war  profits.  To  permit 
individuals  and  corporations  to  enrich 
themselves  out  of  the  dreadful  calamity 
of  war  is  repugnant  to  one's  sense  of 
justice  and  gravely  detrimental  to  the 
war  morale  of  the  people. 

Strictly  from  the  economic  point  of 
view,  the  eighty  per  cent,  war  profits  tax 
is  not  entirely  free  from  objection. 
Whether  England  did  wisely  on  the  whole 
in  fixing  the  tax  at  quite  so  high  a  rate  is  a 
debatable  point,  and  is  being  questioned 

29 


PUNITIVE  PATERNALISM 

by  some  economists  of  high  standing  in 
that  country,  not  from  the  point  of  view 
of  tenderness  for  the  beneficiaries  from 
war  profits,  but  from  that  of  national 
advantage. 

Moreover,  conditions  in  America  and 
England  are  not  quite  identical  and  I 
believe  it  to  be  a  justifiable  statement 
that  British  industry  is  better  able  to 
stand  so  high  a  tax  than  American 
industry,  for  reasons  inherent  in  the  re- 
spective business  situations  and  methods. 

However,  everything  considered,  cir- 
cumstances being  what  they  are,  I  believe 
the  enactment  of  the  proposed  eighty  per 
cent,  war  profits  tax  to  be  expedient,  pro- 
vided that,  like  in  England,  the  standard 
of  comparison  with  pre-war  profits  is  fairly 
fixed  and  due  and  fair  allowance  made,  in 
determining  taxable  profits,  for  such  bona 
fide  items  of  depreciation  and  other  write- 
offs as  a  reasonably  conservative  business 

30 


IN  TAXATION 

man  would  ordinarily  take  into  account 
before  arriving  at  net  profits. 

Amongst  the  principles  of  correct  and 
effective  taxation,  which  are  axiomatic, 
are  these: 

1.  No  tax  should  be  so  burdensome  as  to 
extinguish    or    seriously    jeopardize    the 
source  from  which  it  derives  its  produc- 
tivity.   In  other  words,  do  not  be  so  eager 
to  secure  every  possible  golden  egg,  that 
you  kill  the  goose  which  lays  them. 

2.  In  war  time,  when  the  practice  of 
thrift  is  of  more  vital  importance  than  ever 
to  the  nation,  one  of  the  most  valuable  by- 
products which  taxation  should  aim  to 
secure  is  to  compel  reduction  in  individual 
expenditures. 

3.  Taxation  should  be  as  widely  diffused 
as  possible,  at  however  small  a  rate  the 
minimum  contribution  may  be  fixed,  if  only 
to  give  the  greatest  possible  number  of 
citizens  an  interest  to  watch  governmental 
expenditure,    and    an   incentive    to    curb 
governmental  extravagance. 

It  may  safely  be  asserted  that  our  war 
taxation  runs  counter  to  every  one  of 
these  tested  principles. 

31 


PUNITIVE  PATERNALISM 


ii 


The  characteristic  difference  between 
the  House  Bill  and  the  revenue  measures 
of  Great  Britain  (I  am  not  referring  to 
those  of  France  and  Germany,  because 
they  are  incomparably  less  drastic  than 
ours  or  Great  Britain's)  is,  first,  that  we 
do  not  resort  to  consumption  taxes  and 
only  to  a  limited  degree  to  general  stamp 
taxes,  and,  secondly,  that  our  income 
tax  on  small  and  moderate  incomes  is  far 
smaller,  on  large  incomes  somewhat 
smaller  and  on  the  largest  incomes  a 
great  deal  heavier. 

The  House  rate  of  taxation  on  incomes 
up  to,  say,  $5,000,  averages  only  one- 
fifth  of  what  it  is  in  England;  the  House 
rate  of  taxation  on  maximum  incomes  is 
approximately  fifty  per  cent,  higher  than 

32 


IN  TAXATION 

it  is  in  England.  Moreover,  married 
men  with  incomes  of  less  than  $2,000  are 
entirely  exempted  from  taxation  in  this 
country.  In  England  all  incomes  from 
$650  on  are  subject  to  taxation. 

I  believe,  on  the  whole,  our  system  of 
gradation  is  juster  than  the  English 
system,  but  I  think  we  are  going  to  an 
extreme  at  both  ends.  And  it  must  be 
borne  in  mind  that  our  actual  taxation 
of  high  incomes  is  not  even  measured  by 
the  rates  fixed  in  the  House  Bill,  because 
to  them  must  be  added  State  and  muni- 
cipal taxes.  There  must  further  be  added 
what  to  all  intents  and  purposes  is, 
though  a  voluntary  act,  yet  in  effect  for 
all  right-minded  citizens  tantamount  to 
taxation,  namely,  a  man's  habitual  ex- 
penditures for  charity  and  his  contribu- 
tions to  the  Red  Cross  and  other  war 
relief  works. 

The  sentimental  and  thereby  the  actual 

33 


PUNITIVE  PATERNALISM 

effect  of  extreme  income  taxation  is  not 
confined  to  the  relatively  small  number 
of  people  in  possession  of  very  large 
incomes  directly  affected  by  it.  The 
apprehension  caused  by  the  contempla- 
tion of  an  excessively  high  ratio  of  taxa- 
tion is  contagious  and  apt  to  react 
unfavorably  on  constructive  activity. 

It  is  highly  important  that  taxation 
should  not  reach  a  point  at  which  business 
would  be  crippled,  cash  resources  unduly 
curtailed  and  the  incentive  to  maximum 
effort  and  enterprise  destroyed.  And  it 
should  not  be  forgotten  that  both  theor- 
etically and  actually  the  spending  of 
money  by  the  Government  cannot  and 
does  not  have  the  same  effect  on  the  pros- 
perity of  the  country  as  productive  use 
of  his  funds  by  the  individual. 

If  all  the  European  nations  have  stopped 
during  the  war  at  a  certain  maximum 
limit  of  individual  income  and  inheritance 

34 


IN  TAXATION 

taxation,  even  after  four  years  of  war, 
the  reason  is  surely  not  that  they  love 
rich  men  more  than  we  do  or  that  they 
are  all  less  democratic  than  we  are. 
The  reason  is  that  these  nations,  including 
the  financially  wisest  and  most  expe- 
rienced, recognize  the  unwisdom  and 
economic  ill  effect  under  existing  condi- 
tions of  going  beyond  that  limit. 


35 


PUNITIVE  PATERNALISM 


m 

The  same  observations  hold  good  in 
the  case  of  our  proposed  inheritance  taxa- 
tion (maximum  proposed  here  forty  per 
cent.,  as  against  twenty  per  cent,  maxi- 
mum in  England  and  much  less  in  all 
other  countries).  And  again  there  are  to 
be  added  .to  Federal  taxation  the  rates  of 
state  legacy  and  inheritance  taxation. 

Inheritance  taxation,  moreover,  has 
that  inevitable  element  of  unfairness  that 
it  leaves  entirely  untouched  the  wastrel 
who  never  laid  by  a  cent  in  his  life,  and 
penalizes  him  who  practiced  industry, 
self-denial  and  thrift.  And  it  cannot  be 
too  often  said  that  the  encouragement  of 
thrift  and  enterprise  is  of  the  utmost 
desirability  under  the  circumstances  in 
which  the  world  finds  itself,  because  it  is 

36 


/AT  TAXATION 

only  by  the  intensified  creation  of  wealth 
through  savings  and  production  that  the 
world  can  be  re-established  on  an  even  keel 
after  the  ravages  and  the  waste  of  the  war. 

Furthermore,  business  men,  of  neces- 
sity, have  only  a  limited  amount  of  their 
capital  in  liquid  or  quickly  realizable 
form,  and  through  the  absorption  by  the 
inheritance  tax  of  a  large  proportion  of 
such  assets,  many  a  business  may  find 
itself  with  insufficient  current  capital  to 
continue  operations  after  the  death  of  a 
partner.  This  effect  is  not  only  unfair  in 
itself,  but  is  made  doubly  so,  as  being  a 
discrimination  in  favor  of  corporations  as 
against  private  business  men  and  busi- 
ness houses,  inasmuch  as  corporations 
are,  of  course,  not  amenable  to  inheritance 
taxation. 

Whilst  in  the  case  of  the  rich  we  dis- 
courage saving  by  the  very  hugeness  of 
our  taxation,  or  make  it  impossible,  we 

37 


PUNITIVE  PATERNALISM 

fail  to  use  the  instrument  of  taxation  to 
promote  saving  in  the  case  of  those  with 
moderate  incomes.  And  the  enormous 
preponderance  of  saving  which  could  and 
should  be  effected  does  not  lie  within  the 
possibilities  of  the  relatively  small  number 
of  people  with  large  means,  but  of  the  huge 
number  of  people  with  moderate  incomes. 

Moreover,  while  the  rich,  in  conse- 
quence of  taxation,  limitation  of  profits, 
etc.,  have  become  less  able  to  spend 
freely  since  our  entrance  into  the  war, 
workingmen  and  farmers,  through  in- 
creased wages,  steadier  employment  and 
higher  prices  of  crops,  respectively,  have 
become  able  to  spend  more  freely. 

Workingmen  are  in  receipt  of  wages 
never  approached  in  pre-war  times,  many 
of  them  making  incomes  a  good  deal 
higher  than  the  average  professional  man, 
while  the  profits  of  business,  generally 
speaking,  are  rather  on  a  declining  scale 

38 


IN  TAXATION 

and  certain  branches  of  business  have  been 
brought  virtually  or  even  completely  to 
a  standstill. 

Of  our  total  national  income,  conserva- 
tively estimated  at,  say,  $40,000,000,000 
for  the  last  year  before  our  entrance 
into  the  war,  i.  e.,  the  year  1916,  it  is  safe 
to  say  that  not  more  than  $2,000,000,000 
went  to  those  with  incomes  of,  say, 
$15,000  and  above,  whilst  $38,000,000,000 
went  to  those  with  lower  incomes. 

A  carefully  compiled  statement  issued 
by  the  Bankers  Trust  Company  of  New 
York  estimates  the  total  individual  in- 
comes of  the  nation  for  the  fiscal  year 
ending  June  30,  1919,  at  about  $53,000,- 
000,000,  and  calculates  that  families  with 
incomes  of  $15,000  or  less  receive  $48,- 
250,000  of  that  total;  or,  applying  the 
calculation  to  families  with  incomes  of 
$5,000  or  less,  it  is  found  that  they  receive 
$46,000,000,000  of  that  total. 

39 


PUNITIVE  PATERNALISM 


v 


Whilst  the  House  Bill  imposes  luxury 
and  semi-luxury  taxes,  it  fails — as  I  have 
mentioned  before — to  resort  to  consump- 
tion taxes  of  a  general  kind — a  deliberate 
but,  in  my  opinion,  unwarrantable  omis- 
sion. 

My  advocacy  of  consumption  and  simi- 
lar taxes,  such  as  stamp  taxes  of  many 
kinds,  is  not  actuated  by  any  desire  to 
relieve  those  Avith  large  incomes  from  the 
maximum  of  contribution  which  may 
wisely  and  fairly  be  imposed  on  them.  I 
advocate  consumption  and  general  stamp 
taxes — such  as  every  other  belligerent 
country  without  exception  has  found  it 
well  to  impose — because  of  the  well 
attested  fact  that  while  productive  of 
very  large  revenues  in  the  aggregate,  they 

40 


IN  TAXATION 

are  easily  borne,  causing  no  strain  or 
dislocation,  and  automatically  collected; 
and  because  of  the  further  fact  that  they 
tend  to  induce  economy  than  which 
nothing  is  more  important  at  this  time 
and  which,  as  far  as  I  can  observe,  is 
not  being  practised  by  the  rank  and  file  of 
our  people  to  a  degree  comparable  to 
what  it  is  in  England  and  France. 

The  tendency  of  the  House  Bill  is  to 
rely  mostly  on  heavy  taxation — in  some 
respects  unprecedentedly  heavy — of  a 
relatively  limited  selection  of  items.  I 
am — as  I  have  already  said — in  favor  of 
the  highest  possible  war  profits  tax  and  of 
at  least  as  high  a  rate  of  income  and  in- 
heritance taxation  during  the  war  as 
exist  in  any  other  country.  But  apart 
from  these  and  a  few  other  items  which 
can  naturally  support  very  heavy  taxa- 
tion, such,  for  instance,  as  cigars  and 
tobacco,  I  believe  that  the  maximum  of 

41 


PUNITIVE  PATERNALISM 

revenue  and  the  minimum  of  economic 
disadvantage  and  dislocation  can  be 
secured  not  by  the  very  heavy  taxation  of 
a  relatively  limited  selection,  but  by 
comparatively  light  taxation  distributed 
over  a  vast  number  of  items.  I  believe 
such  taxes  would  be  productive  enough  to 
make  good  the  impending  revenue  losses 
from  Prohibition. 

I  think,  for  instance,  the  imposition  of  a 
tax  of  one  per  cent,  on  every  single  pur- 
chase exceeding,  say,  two  dollars  (the  tax 
to  be  borne  by  the  purchaser,  not  by  the 
seller)  would  be  productive  of  a  large 
amount  of  revenue  and  be  harmful  to 
none.  A  similar  tax  was  imposed  in  the 
course  of  the  Civil  War  and  appears  to 
have  functioned  so  well  and  met  with  such 
ready  acceptance  that  it  was  not  repealed 
until  several  years  after  the  close  of  that 
war. 

There  is  apparently  small  limit  to  the 

42 


IN  TAXATION 

zeal  of  many  politicians  and  others  when 
it  is  a  question  of  taxing  business  and 
business  men,  especially  those  guilty  of 
success.  We  are,  I  believe,  justified  in 
inquiring  to  what  extent  there  is  a  rela- 
tion between  this  tendency  and  political 
considerations  which  ought  to  be  remote 
from  the  treatment  of  economic  subjects 
such  as  taxation. 

Let  us  take,  as  an  instance,  the  case  of 
the  farmer.  I  do  not  pretend  to  judge 
whether  in  these  war  times  the  farmers  of 
the  country  are  bearing  an  equitable 
share  of  taxation  in  proportion  to  other 
callings  or  not.  I  certainly  recognize  that 
they  are  entitled  to  be  dealt  with  liberally, 
even  generously,  for  I  know  the  rigors  of 
the  farmers'  life,  the  ups  and  downs  of 
their  industry's  productivity,  and  fully 
appreciate  that  their  work  lies  at  the 
very  basis  of  national  existence.  Every- 
thing that  can  fairly  make  for  the  con- 

43 


PUNITIVE  PATERNALISM 

tentment,  well  being  and  prosperity  of 
the  farmer  is  to  be  wholeheartedly  wel- 
comed and  promoted. 

Yet,  we  cannot  avoid  noticing  that  the 
average  value  of  farm  lands  in  this  coun- 
try is  estimated  to  have  increased  between 
1900  and  1918  more  than  200  per  cent., 
that  the  value  of  farm  products  has  been 
vastly  enhanced,  but  that  according  to 
the  latest  published  details  of  income  tax 
returns,  the  farmer  contributes  but  a  very 
small  percentage  to  the  total  income  tax 
collected.  Of  twenty-two  selected  occu- 
pations the  farmers'  class  contributes  the 
least  in  the  aggregate,  although  it  is 
numerically  the  largest  class  in  the 
country. 

Let  it  be  clearly  understood  that  I  have 
not  the  remotest  thought  of  suggesting 
"tax  dodging"  on  the  part  of  the  farmers. 
I  know  well  how  fully  they  are  doing  their 
part  towards  winning  the  war,  and  am 

44 


IN  TAXATION 

entirely  certain  that  they  are  just  as  ready 
to  carry  patriotically  their  due  share  of 
the  financial  cost  of  achieving  victory  as 
the  splendid  young  fellows  taken  from  the 
farms,  many  of  whom  I  met  in  Europe, 
have  been  ready  to  bear  their  full  share  of 
the  cost  in  life  and  limb  of  achieving 
victory. 

The  point  of  my  question  is  not  the 
action  and  attitude  of  the  farmer.  But 
here  is  a  great  industry  exempt  from  the 
excess  profit  and  war  profit  tax  and 
apparently  not  effectively  reached  by  the 
income  tax,  which  is  entirely  natural, 
because  in  this  case  the  income  tax  can 
neither  be  retained  at  the  source  nor  are 
the  large  body  of  the  farmers,  many  of 
whom  do  not  keep  and  cannot  be  expected 
to  keep  books,  in  a  position  to  determine 
their  taxable  income. 

Is  it  conceivable  that  the  politicians 
who  are  so  rigorous  in  their  watchfulness 

45 


PUNITIVE  PATERNALISM 

that  no  business  profit  shall  escape  the 
tax-gatherer,  would  not  devise  means  to 
lay  an  effective  tax  if  the  same  situation 
existed  in  a  business  industry? 

The  point  of  my  question  is,  taking  the 
case  of  the  farmers  as  an  instance, 
whether  in  framing  our  system  and  meth- 
od of  taxation,  the  steady  aim  has  been 
to  ascertain  impartially  what  is  equitable 
and  wisely  productive  of  revenue  and  to 
act  accordingly,  or  whether  considera- 
tions of  the  anticipated  effect  of  taxation 
measures  upon  the  fortunes  of  individual 
legislators  or  of  their  party,  have  been 
permitted  unduly  to  sway  their  delibera- 
tions and  conclusions. 


46 


IN  TAXATION 


IV 

Turning  aside  from  this  interrogation 
mark,  I  will  only  add,  in  returning  to  our 
general  scheme  of  taxation,  that  there  are 
numerous  taxes  of  a  tried  and  tested  and 
socially  just  kind — some  of  them  applied 
in  this  country  during  the  Civil  War  and 
the  Spanish  War — which  would  raise  a 
very  large  amount  of  revenue  and  yet 
would  be  little  felt  by  the  individual. 
Some  of  them  have  been  suggested  to 
our  legislators,  but  have  not  found  favor 
in  their  eyes.  Their  non-imposition, 
taken  together  with  the  entire  character 
of  our  taxation  program,  the  burden  of 
which  falls  to  an  enormously  preponder- 
ant extent  upon  the  mainly  industrial 
States  and  the  business  classes,  not  only 
proportionately,  which,  of  course,  is  just, 

47 


PUNITIVE  PATERNALISM 

but  discriminatingly,  which  is  not  just, 
seems  hardly  explainable  except  on  the 
theory  that  the  intention  of  those  who 
were  primarily  in  charge  of  framing  that 
program  was  punitive  and  corrective  and 
that  they  were  influenced — though  I  am 
willing  to  believe  unconsciously — by  sec- 
tional and  vocational  partiality. 

The  fact  that  the  revenue  bill  was 
passed  in  the  House  by  a  unanimous  vote 
does  not  mean,  of  course,  that  it  met  with 
unanimous  approval  on  the  part  of 
Congressmen.  The  debate  shows  this. 
The  bill,  as  reported  after  months  of 
labor,  either  had  to  be  approved  practi- 
cally as  it  stood  or  rejected  and  returned 
to  the  Committee.  It  is  not  possible  for 
a  body  of  400  men  to  deal  in  a  detailed 
manner  with  a  subject  so  complex  as  a 
taxation  measure  of  the  magnitude  of  the 
present  one. 

The  bill  could  not  be  made  over  or 

48 


IN  TAXATION 

materially  amended  in  the  House.  In 
view  of  the  urgency  of  the  emergency  and 
the  vital  need  to  raise  the  sum  asked  for 
by  the  Treasury,  no  patriotic  course  was 
open  to  the  House  but  to  accept  the  bill 
and  pass  it  up  to  the  Senate. 

I  know  it  is  not  popular  to  say  things  in 
criticism  of  war  burdens  of  a  financial 
nature.  One's  motives  are  liable  to  be 
misunderstood  or  misinterpreted  and  he 
is  very  apt  to  have  it  scornfully  pointed 
out  to  him  how  small  relatively  is  the 
sacrifice  asked  of  him,  compared  with  the 
sacrifice  of  position,  prospects,  and  life 
itself,  so  willingly  and  proudly  offered  by 
the  young  manhood  of  the  land. 

It  is  a  natural  and  effective  rejoinder, 
but  it  is  not  a  sound  or  logical  one. 
Heaven  knows,  my  heart  goes  out  to  our 
splendid  boys,  and  my  admiration  for 
their  conduct  and  achievements  and  my 
reverence  for  the  spirit  which  animates 

49    . 


PUNITIVE  PATERNALISM 
IN  TAXATION 

them  knows  no  bounds.  But  I  am  ac- 
quainted with  hundreds  of  business  men 
who  bemoan  their  gray  hair  and  their 
responsibilities,  which  prevent  them  from 
having  the  privilege  of  fighting  our  foe 
arms  in  hand. 

And  I  know  no  American  business  man 
worthy  of  the  name,  who  would  not  will- 
ingly give  his  life  and  all  his  possessions 
if  the  country's  safety  and  honor  required 
that  sacrifice. 


50 


Oaylord  Bros. 

Makers 

Syracuse,  N,  Y, 
PAT.  JAN.  21,  1908 


18933 


383550 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


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